You Don’t Say

Last week Peter Eavis of DealBook highlighted a statement made last year by New York Fed President William Dudley (formerly of Goldman Sachs, then a top lieutenant to Tim Geithner): “There is evidence of deep-seated cultural and ethical failures at many large financial institutions.” There was a point, say in 2008, when many people probably thought that our largest banks were just guilty of shoddy risk management, dubious sales practices, and excessive risk-taking. Since then, we’ve had to add price fixing, money laundering, bribery, and systematic fraud on the judicial system, among other things.

Eavis also tried to make something positive out of a couple of other recent comments. Dudley said, “I think that trust issue is of their own doing—they have done it to themselves,” while OCC head Thomas Curry said, “It is not going to work if we approach it from a lawyerly standpoint. It is more like a priest-penitent relationship.”

I don’t see much reason for optimism. First, framing the problem as a “trust issue”—customers no longer see banks as trustworthy institutions—is beside the point. Wall Street’s main defense is that its clients already realize that investment banks do not have their buy-side clients’ best interests at heart, and clients who don’t realize that are chumps. And in the wake of the financial crisis, I suspect there are few individuals out there who believe that their banks are there to help them. The banking industry has discovered that it can thrive without trust, which is not surprising; retail depositors trust the FDIC, and bond investors know that trust isn’t part of the equation.

Second, when an entire industry shows a deep proclivity to flaunt the law, it’s distressing that one of its top regulators sees himself more as a priest than as a lawyer. With a priest, the presumption is that the congregant actually wants to be saved, and therefore will listen to the priest. Wall Street banks just care about profits, which is only natural. Once they’ve learned that they can be profitable without being ethical, there’s no turning back. The only way to change the equation is to make lawbreaking unprofitable, which means serious penalties, both civil and criminal.

In that vein, the SEC is especially proud of a judge’s decision last week to impose an $825,000 fine on Fabrice Tourre, the Goldman employee implicated in the ABACUS deal. The SEC’s enforcement director claimed that the penalty reflected “the S.E.C.’s intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws.” If only.

That is a meaningful sanction, particularly because the judge prohibited Goldman from covering Tourre’s penalty of $650,000. I doubt, however, that she could stop Goldman employees from individually gifting cash to Tourre. And, if they have any kind of sense of fairness, they should start passing the hat—because Tourre was the only one out of probably thousands of people engaged in similar behavior who got busted. Which means that, if you want to structure deals so they are likely to collapse and lie about it to your buy-side clients, the odds are spectacularly in your favor. More important, if you are a senior executive and you want to pressure your employees (including by promising them huge bonuses) to structure deals that are likely to collapse and lie about it to your buy-side clients, the odds in your favor approach certainty.

Talk is cheap. But ultimately, it’s hard to see how anyone’s behavior is going to change with the regulators we’ve got.

Torre forgot the first law of email use as a lawyer at the company where I worked said in 1993 “Don’t say anything in an email you would not mind appearing on the front page of the New York Times tommorrow” It seems that in general corporate folks need to be instructed in this. maxim as an awful lot of folks have gotten caught with their emails down. Since land lines at banks are recorded, I guess there is always a walk in the park.

If you cut funding for the regulators and loosen the regulations, you can’t make much in the way of changes. I agree that more financial industry folks should be convicted, but it is the federal government which is responsible for minding the hen house. And so it goes.

Again, the real story is that the big banks were acting just as the law and regulators wanted them to do. The story is now available for anyone who isn’t a political hack; ‘Fragile By Design: the Political Sources of Banking Crises and Scarce Credit’

From page 223 of Calomiris and Haber, we learn that just one activist group ACORN, between 1993-2008, managed to extort, using the CRA ratings as a cudgel; $13.5 million from Bank of America, $9.5m from JPMC, $7.4m from HSBC and $8.1m from Citibank.

In return for which ACORN testified to regulators’ hearings, in support of allowing those banks to merge into megabanks that were to become too big to fail. The fees and ‘contributions’ above are in addition to the credit that the banks funnelled to ACORN and other groups, which amounted to $867 billion by 2008.

Here’s ACORN’s George Butts’s testimony in support of the Bank of America-Nations Bank merger in 1998;

‘…their step forward did a lot to bring our kind of underwriting standards for low income people into the mainstream of the mortgage market. At the time these things were pretty radical, but today no one thinks twice about the approprirate use of low downpayments, nontraditional credit, food stamps as income, voluntary child support….’

In addition to all that, the same banks committed to another $3.6 trillion in CRA lending that they administered themselves outside the activists.

Financial penalties would work. Imprisonment would work. I think executions of bank CEOs would be the best deterrent, however. Their actions fit the ridiculously broad definition the government currently uses for terrorism, so this shouldn’t be too hard to do if we get a government which gives a damn.

There was an interesting note on 4chan about the uselessness and irrelevance of banks by a guy who has closed his account and uses his local GameStop instead. Apparently, when he gets his paycheck, he keeps some as cash, but the rest goes to GameStop where he pre-purchases as yet to be released video games. When he needs more cash, he cancels a game pre-order and gets his refund. He usually buys a game or two a year, as he is a gamer, but otherwise he keeps his savings in video game futures. The downside is that there is no FDIC insurance and GameStop might change its policies, but the upside is convenience, no fees, better service and so on.
As often happens when the banking system fails, others step in and improvise to provide some form of currency. I live a block for Lauridsen Boulevard, and Lauridsen was locally famous for issuing his own currency during the 1907 crisis. During the “bank holiday” of the early 1930s, a lot of businesses treated uncashed checks as fungible IOUs, and if the holiday had lasted longer, these would have evolved into a currency of sorts. For all I know, the currency of the future may not be bitcoins, but Halo 34 prerelease credits.
(I’d provide a link to 4chan, except that 4chan is non-archival. Instead see: http://kottke.org/14/03/the-first-national-bank-of-gamestop).

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